The Pending Kodak Patent Auction May Create Weapons Of Business Destruction

from the loose-nukes dept

At the moment, the patent system is seriously malfunctioning. The high volume of low quality, poorly defined patents, particularly in the software and IT industries, is catalyzing the explosion in patent litigation. And lately, the problem has been getting much worse. In fact, the amount of litigation involving software patents has tripled since 1999 and a software patent is more than twice as likely [PDF] to be involved in litigation as its non-software counterparts.

Our broken system affirmatively penalizes innovation. Empirical research has shown that the more money a company invests in R&D, the more likely it is to be punished with infringement litigation. This weakens our economy and harms our nation’s global competitiveness. Just ask America’s most prolific legal scholar, Judge Richard Posner. Furthermore, last year’s patent “reform” legislation, the America Invents Act (AIA), did little to solve the fundamental problems at the heart of the current explosion in litigation. As Richard Waters of Financial Times wrote last year, the AIA did little to fix the broken system:

Yet, while there was general agreement that an overhaul was badly needed, the law that was eventually passed did little to fix what is widely seen as the current system’s chief weakness: that it leads to the issuing of too many patents that lack real innovation and that clog up the legal system once their holders seek to enforce them against alleged infringers.

As a result, we have arrived at another inflection point as patents, and the problems surrounding them, are again in the headlines. Although the Samsung vs. Apple trial, and its fight over who owns the rights to a rectangle, is getting a majority of the recent headlines, another major patent battle is looming. This Monday opening bids were submitted ahead of an August 8 auction for some 1,100 patents belonging to the now bankrupt Eastman Kodak Corporation. Given the rampant patent litigation in the high-tech space, the thought of 1,100 more litigation weapons flooding the marketplace is troubling. The situation gets even more worrisome when one looks at the parties lining up to bid.

The Wall Street Journal reports that both Apple and Google are leading competing consortia in an effort acquire these patents, which largely pertain to digital photography – a key component in smartphones. The consequences of this will potentially open up another front in the smartphone patent wars. Although Google’s consortium appears defensive, as it is made up of its partners in the Android ecosystem, Samsung, LG and HTC, and defensive patent aggregation firm RPX (which pledges never to assert its patents offensively), Apple’s consortium is headlined by the notorious (and massive) patent assertion firm, Intellectual Ventures, and Microsoft.

As many observers of the patent world may remember, there have been two major recent patent auctions in the IT space, where failing companies’ patent portfolios have been put on the auction block. In the case of Novell, which was in the process of being acquired by Attachmate, 882 patents were sold to a consortium of bidders, including Apple, Microsoft, EMC and Oracle. In the case of Nortel, the former Canadian Telecom giant that fell on hard times and went bankrupt, its patent portfolio was eventually purchased by Rockstar Bidco, a consortium of companies that included Apple, Microsoft, Sony and EMC. In both cases competition concerns were raised, particularly from supporters and users of open-source software, that prior commitments made by patent holders and new commitments made by the purchasers, not to use patents against open-source software (or to abide by prior FRAND commitments) would be honored.

However, despite these concerns, the antitrust regulators world over – relying on pledges from the parties involved in the transaction – stated their belief that the prior commitments from Novell and Nortel regarding the use of their patents would be honored by the new owners.

When the OSI first learned of this proposed transaction, we were alarmed that four companies with dominant market positions and a mixed attitude towards open source software could redeploy what the open source community had considered to be a friendly asset–Novell’s patent portfolio–into a weapon against open source software. We are delighted that you have made clear that the [german antitrust regulator] cannot allow a transaction that would create or strengthen a dominant position on markets in which such investors are active, and we are happy to provide the additional information you have requested about the proposed restructuring of this transaction.

In the US, the DOJ approved both deals (plus Google’s Motorola acquisition) but said it would continue to monitor the wireless device space because it remained concerned as to whether or not prior pledges would be honored:

The division’s continued monitoring of how competitors are exercising their patent rights will ensure that competition and innovation are unfettered in this important industry.

All three of the transactions highlight the complex intersection of intellectual property rights and antitrust law and the need to determine the correct balance between the rightful exercise of patent rights and a patent holder’s incentive and ability to harm competition through the anticompetitive use of those rights.

However, soon thereafter, the President of the company behind the Apple and Microsoft backed bid – the Rockstar Consortium – publicly repudiated new commitments made by the companies that established it, saying: “We are separate. [Apple and Microsoft's pledges] don’t apply to us.”

This is made even more troubling by other comments that the head of the Rockstar Consortium, John Veschi, made in the same article, which included doozies like:

“Pretty much anybody out there is infringing… It would be hard for me to envision that there are high-tech companies out there that don’t use some of the patents in our portfolio.”

And this revealing comment that articulates Veschi’s justification for holding the rest of the industry hostage:

“A lot of people are still surprised to see the quality and the diversity of the IP that was in Nortel… And the fundamental question comes back: ‘How the hell did you guys go bankrupt? Why weren’t you Google? Why weren’t you Facebook? Why weren’t you all these things, because you guys actually had the ideas for these business models before they did?’ They were within a Bell Labs-y kind of environment, and maybe the wherewithal of turning them into businesses wasn’t necessarily there.”

So, to recap, the commitments that gave worldwide antitrust regulators the confidence to approve these controversial deals are being repudiated by the individual with the power to ignore them, and who thinks that:

Everyone in the IT industry infringes on his patents.

Because Nortel – his former employer where the Rockstar patents came from – had some ideas, but was less successful at implementing them, he has the right to hold the rest of the IT industry hostage.

Apparently, the purpose of the patent system is to allow unsuccessful companies the right to extract billions of dollars from companies that are more successful. (Again, how is this not a net drag on innovation?)

But the very fact that he claims EVERYONE in the IT industry infringes on his patents seems to be prima facie evidence that many, if not most, of these patents were not novel, and therefore invalid… unless he is contesting that every IT company stole Nortel’s ideas, which is laughable. But I digress…

What we do know now is that patent commitments made to competition authorities are suspect (and, of course, commitments are made to be broken), particularly when patents are controlled by NPEs outside of the direct control of the original purchasers.

Loose Nukes

To fully understand the problems posed by Intellectual Ventures’ involvement in this new consortium, one must also understand the tectonic shift in the underlying foundations of the patent system. Although the explosion of low-quality, poorly defined patents – particularly in the software space – has long been identified as a problem that greatly increases litigation risk and the overall deadweight loss to our economy, the problem has been largely isolated until recently. It was once thought that the threat of Mutually Assured Destruction (MAD to borrow the Cold War acronym), meant that the big companies with large patent portfolios would not sue their peers because they would be sued back and everyone would lose. However, the rapid growth of huge non-producing entities (NPEs) that exist solely to exert other people’s patents (usually acquired through bankruptcy) against successful companies greatly changed the precarious MAD equilibrium that once existed.

Some – admittedly clever – companies, such as Apple, recognized that they could acquire patents, take a perpetual license to them, and then sell them off to NPEs such as Intellectual Ventures (or as they have already done with Digitude), who are then incentivized to attack the original purchasers' competitors (because the purchasers have a license and its competitors don’t). This strategy allows the original purchaser to attack their competitors and make money off of the patent sale to the NPE (and often they take a cut of the litigation and settlement revenue as well) all the while insulating themselves from the threat of countersuit (the NPE is immune to the threat of counter-assertion because they don’t make products and therefore do not infringe on anyone’s patents).

To extend the nuclear war metaphor to encapsulate this new phenomenon, if the old paradigm was Mutually Assured Destruction where corporations, like nation states, refuse to attack each other because of the threat of personal annihilation, these new NPEs are akin to stateless terrorist entities with nuclear weapons, who are immune to direct threat of attack. Also, much like stateless terrorist organizations, these NPEs move in the shadows and cover their tracks. Intellectual Ventures, by one scholars account, has at least 1300 shell corporations – so its activities are difficult to track. So, we therefore see “states” discretely selling “nukes” to “terrorist cells” with the understanding that they will be used against their foes who cannot directly attack them back.

The bankruptcy portfolio auctions, however, are a variation on this theme, and are more similar to loose nukes from “failed states,” wherein weapons of business destruction flood the marketplace as one entity fails, and the remaining entities with the most to lose – enterprises that actually produce value – must scramble to keep these loose nukes out of the hands of less reputable actors.

DOJ Should Review Newest Auction with Recent Trends in Mind

These patent consortiums allow companies like Apple and Intellectual Ventures to work together to acquire more patents that will be used in the thermonuclear war against Android. As the case of the prior auctions make clear, the commitments that competition authorities have relied on in the past to ensure that these consortiums don’t use patents “anticompetitively” (which is semi-ironic, given that new patent thickets are valuable because they give you the right to harass your competition) are suspect at best, particularly because Intellectual Ventures will filter the patents through a network of “legally distinct” shell companies – companies that “companies” will likely claim prior commitments don’t apply to them – before they are used against Apple’s Android competitors, which they surely will be, given the incentives of those involved.

Given the Justice Department’s prior concerns and recent micro and macro trends in the patent ecosystem, it seems that it is completely appropriate for the DOJ (and competition authorities around the world) to review this upcoming transaction from a different lens than it did just 6 months ago. The world has changed.

Knife fight

Business competition is like a knife fight. And a patent is a nuke to that knife fight. And the competition needs to spend time and money on how to disarm that nuke with a knife, instead of new products/jobs.

The fall of Kodak due to digital photography is so ironic, since it was Kodak that invented the digital camera (many years before anyone else) but decided against taking to to market because they felt it would cannibalize their lucrative film & print business.

Then by the time the execs at Kodak finally decided they had no choice but to abandon film and join in on the 'digital revolution' -- kicking and screaming-- the market was already saturated.

It's just another sad example of companies --especially those in the media business -- that steadfastly refuse to adopt new technologies because they think it might hurt their outdated old-world business. And then pay dearly for that bad business strategy.

No, the only thing that has really changed is perceptions of it. It's "sky is falling" posts like this on your blog as well as sites like Techdirt that have really changed.

What you are suggesting is that while Kodak may have merited the patents, they somehow should not be allowed to sell them to the highest bidder because, well, someone MIGHT use them in a way you don't like.

On that basis, don't you think they would be better off trying to get gun sales controlled, or perhaps outlawing alcohol? If you are really going to ask them to get involved in something that MIGHT turn out poorly, that is a much better place, don't you think?

Wow. Apple, Microsoft and Intellectual Ventures. Right out in the open. Keep in mind 75% of developers believe software patents are wrong. This is the two biggest tech firms telling developers to fuck off. Which is what we should do.

We should fuck off to Android, and see if the suits can write their own apps.

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The Federal government needs to step in because these companies are using their patents and copyrights to seriously hinder and limit competition. One look at the whole Apple vs Samsung legal fight seriously highlights this very problem.

Apple is trying to create a monopoly on smartphones by preventing anything that even remotely look similar to the iPhone. Now, this is a company who copied the iPod Classic, iPad, iPod Touch, iPhone and iPad from products that were either already on the market, or in the case of iPad, a device that was specifically created for the Star Trek The Next Generation series.

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Did you know that 99.9% of all statistics are made up on the spot?...

In all fairness where does this 75% figure come from? I know a lot of developers as well and the impression I've drawn is not that they believe patents are fundamentally wrong but that they are abused, often far too broad and the system is in serious need of an overhaul.

Patents aren't bad. Our patent system is bad. Patents do protect investment in expensive R&D. Some of the patents that will be auctioned off come from my brother. The cost of the work behind those patents is astounding and that needs to be considered fairly.

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The 75% number comes from the poll on "When patents attack" as heard on NPR.

Yes, software patents are bad. They are completely unethical. Why? Because they are patents on equasions and algorithms, specifically made unavailable for patent protection. The courts did a cute dance around this by declaring a general purpose computer running different software a different "machine." This is like stating that a different DVD in your player creates a different machine.

The cost of work does not enter in to the equation. Patents cover innovation, not hard work. How about the cost of work that everyone else has taken to create the exact same features independently of Kodak? I guarantee that they did not look at the patents, or even know that they exist. So whoever buys these patents gets a free tax payment from the companies that made real, marketable products, something Kodak was unwilling or unable to do. How is that fair?

Please, read the articles on this site that are tagged "patent" before you comment. You seem very poorly informed.

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Patents are mostly used well and properly,

Patents are almost always used badly and improperly. They are a dead loss to everyone. This has always been the case. Every significant invention since patents came along has been hampered in its development by the patent system - which does the exact opposite of what it is supposed to do. The only exceptions are those few instances where the original inventor eschewed the patent system - eg the safety match, the jet engine and the world wide web.

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Patent Abolition

When will the politicians ever wake up? Here we have the patent system stomping around inside the US economy, costing a huge amount of real money in return for benefits which are illusory. No rationally-run company allows its engineers to read other people's patents. Hence the alleged benefit (disclosure) is rendered useless. Patents never contribute to product design, except negatively, on legal advice.

Now, the madness is about to get a lot worse. The vast sums already spent on useless litigation and bogus license fees paid to useless trolls, must get a whole lot larger, when the patents from Kodak sell for a ridiculous sum. This cannot be anything other than harmful to the US economy. If the economy just wastes a huge amount of money instead of using it to do something productive, that has to make the US economy shrink. Since the population is not shrinking, then unemployment must go up.

The US faces competition from other countries. When was the last time you heard of a Chinese company not including some product feature because it violates a patent? That would be never, right? So which product are the world's customers going to buy -- the Chinese one with all the bells and whistles -- or the US one which is missing a few features? Those Chinese, they are smart. They have got steelmaking down pat. Their cars are getting good, they have been taking lessons from Toyota. They will soon be competitive everywhere. What effect will that have on the US economy?

Patent abolition is the answer. Do you know anybody unemployed? How are you going to vote?

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[citation needed]. Please take a list of the last 1 million patents issued, and tell me how many ended up in patent troll lawsuits.

Look at the definition of the word "used".

I agree that millions of patents are issued that never result in any lawsuit. However those patents do nothing other than enrich the patent office. No-one reads them - because if you do you run the risk of "wilful infringement" (plus the fact that they are incomprehensible anyway).

Those patents are not used - the ones that are used are almost always used badly and improperly.

Clever Apple?

Some – admittedly clever – companies, such as Apple, recognized that they could acquire patents, take a perpetual license to them, and then sell them off to NPEs such as Intellectual Ventures

If Apple et al were really that clever, surely they would have heard the maxim "what's good for the goose...". What is to prevent Apple's competitors from selling their portfolios to a different NPE with a nudge and a wink that it might want to go after Apple?

Hell, never mind finding a different NPE, I wouldn't be at all surprised to find IV playing both sides of the fence, just with a different set of shell companies...

more dissembling by Masnick

"high volume of low quality, poorly defined patents"

Nonsense. That's just dissembling by large thieves and their paid puppets -like you! All you know about patents is...YOU DON'T HAVE ANY!!!!

The problem is that companies who are using (a polite way of saying STEALING) your technology aren't so genteel as to stop using it merely because you politely ask them to do so. Invention is rough and tumble. The fact is, a patent is merely a right to sue someone to not make, use or sell your invention without permission. Unless you have the will and money to sue them, they will turn a deaf ear. Unless you have a good patent, you will not get the money. It's sad, but it's the reality of business. All this talk about patentees gaming the system with bad patents is then a hoax. Why do these detractors never identify these supposed bad patents? Surely if they exist they can be identified?

If anyone is gaming the system, it is large multinationals. After losing in court they coerce (some say bribe) the Patent Office into conducting a reexamination on the patents they have been found guilty of infringing. That is pure abuse of process!

The fact is, there is no systematic abuse of the patent system by patentees which would require an overhaul of the system. To the contrary, there is a reason why the patent system works the way it does. We didn't get here by accident. That's because of past abuse of the system by large companies who used their wealth to give small entities the run around and make a sham of the system. Take a look at the RCA/Armstrong case of years ago on FM radio as described in Tom Lewis's "Empire of the Air", chapter 10, p313 and p356. According to Lewis, RCA ruined Armstrong with a legion of attorneys. They so destroyed Armstrong and made a mockery of the patent system that he committed suicide. Part of RCA's outrageous conduct was to string Armstrong along making him think they were interested in his invention only to copy his work and file patent applications of their own. Later they then entered into an interference against him at the patent office -a fraudulent act. RCA committed similar abuses of the patent system against electronic television inventor Philo Farnsworth according to Paul Schatzkin’s "The Boy Who Invented Television".

As to the quality of patents; based on court rulings of the last several years, roughly half of all litigated patents are upheld in court. That's pretty balanced and suggests there is no problem with patent quality. Further, seldom do cases ever make it to trial as the parties settle out of court. The facts do not support the contention that there is a patent quality issue. Still, with almost half a million patent applications filed each year a few are bound to be issued that shouldn't. Many patent system bashers like to cite silly patents such as a cat exercise patent. However, rarely are they ever an issue because you can't enforce them without money and you wont get the money unless you have a good patent. All inventors can do with such patents is paper their bathroom walls. Keep in mind it costs the patent holder about as much in a patent suit as it does the accused infringer. Often times it costs more because in multiple defendant cases infringers will band together to share costs. Investors are not stupid. If they don't have confidence in your patent, they will not invest. It's that simple. Bad patents do not get funded.

If there is a problem with the patent system, it is not that patents are issued too hastily but rather that many are issued too slowly. Witness the current backlog and pendency. I for example have applications with a pendency of 15 years! In one instance it took 3 years just to get a first office action. With this kind of pendency by the time an inventor gets their patent their technology is of no value. Without patents small entities cannot get funded and promising technologies die on the vine. That is the problem everyone should be focused on -not this imaginary issue of patent quality trumped up and propped up by large multinationals as a way to stifle innovation and further cement their market control. Can you say "monopoly"?

When the giant corporations of the world agree to stop stealing our inventions American inventors and small entities will agree to stop suing them.

Re: more dissembling by Masnick

"high volume of low quality, poorly defined patents"

Nonsense. That's just dissembling by large thieves and their paid puppets -like you! All you know about patents is...YOU DON'T HAVE ANY!!!!

The problem is that companies who are using (a polite way of saying STEALING) your technology aren't so genteel as to stop using it merely because you politely ask them to do so. Invention is rough and tumble. The fact is, a patent is merely a right to sue someone to not make, use or sell your invention without permission. Unless you have the will and money to sue them, t...

I thought this was sarcasm at first.

However, let me give you some advice.

Patents do not help small entities who actually wish to invent and market things and no reform will ever change that. The reason is because patents introduce the law into a battle that would otherwise be purely technical and marketing. Once the law enters the arena then the playing field is tipped in favour of large companies and entities that specialise in patent law.

If you are a genuine small inventor then you are unlikely to win this fight. Most likely you will divert yourself away from useful activity and maybe destroy your own health - as happened to one of the founders of your organisation.

Without patents small entities cannot get funded and promising technologies die on the vine.

A popular fallacy. One major counter example is Frank Whittle - who was funded just a few months after he let his patent lapse.

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Patents are mostly used well and properly, and occassionally not. Why suddenly remove Kodak's right to sell the patents on?

Patents are by definition a government granted monopoly.

A monopoly is by definition anti-competitive.

Monopolies are generally bad for innovation and generally bad for consumers.

At best, patents are neutral or benign - but not good or proper. At worst, we've all seen the many, many examples of the harm caused.

If the government grants a monopoly, the government should be able to say how that monopoly is used. Personally, I don't think government should be granting monopolies at all. Maybe a 20 year monopoly over an idea made sense 200 years ago. But now? Product life-cycles are 6-18 months. A company can come from nowhere and be a global powerhouse in 5 years. 20 year monopolies over ideas are beyond absurd.

This says it all

“Pretty much anybody out there is infringing… It would be hard for me to envision that there are high-tech companies out there that don’t use some of the patents in our portfolio.”

If that does not indicate something is wrong with the system, I dont know what does.

When you cant innovate anything without infringing, there is a problem.

And if anything the opposite can be said about:
The primary purpose of copyright law is not so much to protect the interests of the authors/creators, but rather to promote the progress of science and the useful arts—that is—knowledge.

Not anymore. It is ammunition to stifle competitors, and stop others innovation.

Patents and Copyrights lasting too long

There was a point in time not too long ago when Patents lasted 10 years and Copyrights lasted 15 years. This was more than enough time to do something useful with a working patent, and there seemed to be great progress at this time too.

Now we seem to be in a time when patents are issued for things that may not even exist and/or held by users who have little to no intent in implementing them, or even in some cases, patenting something with evidence of prior existence.

I know this more or less says what the article indicates, but I've been seeing this trend in the last decade, and I'm sure I'm not alone on this thought.

Good article.

Now we appear to be in a time where the end consumer is the loser, progress appears to have faltered and litigation seems to be the winner.

Patents and Copyright were something that was supposed to be useful when they were created, but the mess we have now shows otherwise. One solution to this is to make patents and copyrights shorter, as they used to be back in the past when they were first created.